BUSINESS owners in Wales have given their views on the country’s path to post-pandemic recovery, with cuts to business rates topping their list of priorities.

In the Wales Federation of Small Businesses’ (FSB) State of the Nation survey, a majority of respondents said the next Welsh Government should prioritise cuts to business rate taxes, as well as improved access to suitable premises and better broadband and mobile connectivity. Eighty eight per cent of respondents believed that tax breaks should be used by the Welsh Government to incentivise growth and investment.

The FSB published its manifesto earlier this year proposing a business rates freeze, a commitment to not raise income taxes above those in England, and an 'SME test' on any new Welsh taxes. The organisation has also called for the government to explore the possibility of devolving and reducing corporation tax in Wales.

FSB Wales Policy Chair Ben Francis said: “We know that in order for Wales economy to recover from the pandemic, businesses must be empowered to grow.

“A consistent and fair taxation system is a critical part of this. FSB has welcomed the steps that Welsh Government has taken to extend 100 per cent business rates relief for hospitality, tourism and retail businesses until April 2022 – this is an important short-term step towards beginning the process of economic recovery.

“However, this is a more long-term conversation to be had about business rates in Wales. We want to see business rates frozen for the life of the next Parliament, so that we can have the conversations needed to improve the system in the long run.”

Such calls are unsurprising. In a year preceded by falling UK business investment and a steep decline in Welsh business confidence, the onset of the Covid-19 pandemic brought with it unprecedented challenges. Leisure, hospitality and service industries were brought to a standstill, while large construction projects were (mostly) halted in response to new restrictions.

By July 2020, around 60 per cent of SMEs reported that the survival of their business was under threat from reduced trade, despite 75 per cent having applied for government support, according to a Kings College London survey.

Moreover, the latest Economic Intelligence Wales report noted that the number of dissolutions and liquidations of SMEs between January and November last year was around 22 per cent higher than in 2019, warning that more may be to come when government support schemes draw to a close.

According to Professor Calvin Jones of Cardiff University’s Welsh Economy Research Unit (WERU), the instinct to freeze business rates, while somewhat understandable, would lead to increased pressure elsewhere.

He says: “From an SME perspective, from a business perspective – anything that reduces the cost of doing business is a good thing. You can see how, particularly post-pandemic, a freeze to business rates would be viewed as very helpful.

“But taking a wider societal point of view, that money will then have to come from somewhere else. It’s not one to lose. You wouldn’t want to necessarily see burdens of other tax increase whilst business rates are frozen.”

Professor Jones believes that the struggles faced by small businesses, both before the pandemic and now, are more an issue of the structure of the Welsh taxation system itself, which he sees as outdated and in desperate need of reform.

“I think there’s a wider issue here, around business rates, and the way we tax entrepreneurship, wealth, property, in Wales and in the UK – it’s fundamentally broken.

“There are many businesses who’ll be paying way too much in the way of business rates, and many paying not anywhere near enough. As economic activity moves online, the dysfunction is going to get worse and worse.

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“The whole idea of a business being located at a specific premises, and the size and value of that premises being related to the business’ value, that’s already going away.”

This tension was reflected in the FSB survey, with 62 per cent of firms agreeing that business taxes should be the same regardless of whether a company operates at a premises or solely online.

Professor Jones adds: “Even companies now who still have brick-and-mortar shops, due to the impact of the pandemic, they’ve shifted their activity online. Some of them will never go back. Some will continue to do food deliveries, or whatever other activity, and maybe they’ll reduce the size of their premises.

“We need to think about ways of restructuring our taxation system to encourage the right kinds of investment, but also that the right sorts of businesses pay the right sort of money.”

Tax-cut ambitions in the current climate might also be seen as inevitable, particularly as the 2021 Senedd election is the first since new Welsh Government gained powers in 2019 over setting a proportion of income tax.

Since then the government has been able to raise or lower incomes taxes in Wales by up to 10 per cent, and the next party to take control of the Senedd will be able to set the Welsh rate of income tax for the next financial year.

But incentivising investment through tax cuts may not be so easy. Cian Sion, Research Associate at the WERU, said: “The next Welsh Government may find it difficult to cut Welsh Income Tax rates – at least in the short-term – given the more restrained outlook for public spending from next year, as well as the need to fund post-COVID spending pressures.”

The WERU Wales Fiscal Analysis report, published this week estimates local authorities will face a funding gap of £178 million between 2022-23.

Cian adds: “The cost of clearing the elective care backlog in the NHS as well as providing 'catch-up' learning programmes for pupils could be substantial.

“But if a future Welsh Government decided to cut tax rates, the cost of this policy would need to be met from its own budget.

“For example, cutting the basic rate of Welsh Income Tax by 1 pence would reduce devolved tax revenues by roughly £190 million.”

Professor Calvin Jones thinks that the incoming Welsh Government should grasp the nettle of tax restructuring, which he says has been delayed by the enormity of the task.

“When you’re thinking about replacing business rates, there’s a really complicated set of things that a business rate tax does. And that’s a very hard thing to replicate.

“That’s part of the reason they’re still with us, because it’s been too big a job for any Welsh Government to take on so far – and of course, there are never any votes in restructuring taxes, you’ll probably lose more friends than you’ll gain.

“We’ve got this situation now, where probably many businesses are very rightly aggrieved by the amount they’re paying in business rates, but there’s no real easy way out of this unless some political capital is spent. I think that needs to happen.”